Becker Private Equity & Business Podcast
Index Funds vs Individual Stocks vs Allocation of Assets 2-26-25
Wed, 26 Feb 2025
In this episode, Scott Becker dives into the importance of asset allocation, the risks of picking individual stocks, and why broad-based index funds like the S&P 500 may be the smarter choice for most investors.
Chapter 1: What is the significance of asset allocation?
This is Scott Becker with the Becker Private Equity and Business Podcast. Today's discussions is index funds versus individual stocks versus allocation of assets. So here are three core points that we'll make for you. First is the allocation of your portfolio. It doesn't seem very important when everything's going up and everybody feels like a genius and everybody's washed in money.
Chapter 2: How does your stock allocation affect market downturns?
When the market is going down, your allocation of assets, your treasuries to your stocks, the allocation of all of them, are you 30% in stocks? Are you 70% in stocks? Sure makes a big difference. When the market goes down five days in a row, if you're 80% in stocks, it is hard to panic. In contrast, you're 30% in stocks, you breathe and you move forward.
Chapter 3: Why choose index funds over individual stocks?
So the first thing to think about, and I'm not suggesting one allocation or another, but I am suggesting allocation strategies. It's critically important. The second key point is this debate over individual stocks versus index funds. Now, I'm a huge fan, not in specialized index funds, but in broad-based index funds like the S&P 500. Fidelity's got one. Vanguard's got one. Everybody's got one.
Chapter 4: What makes broad-based index funds a preferred choice?
But by and large, unless you're a genius and you have time to really follow the stock market, in a way that's depthful in a way that most of us don't. Like I follow the stock market, but I wouldn't say that I'm doing deep research like Benjamin Graham would want me to do.
Chapter 5: Is deep research necessary for successful stock picking?
So what happens is I come up with a conviction on a stock and I could research it and think through it and believe I've got it right. You know, I bet on Amazon and Microsoft the last several years, believing their cloud business would go great. I bet on Palantir believing that Peter Thiel's a genius. And what you find is,
Chapter 6: What are the risks of betting on individual stocks?
You are so out of your league compared to just investing in index funds because at the end of the day, who can really predict that Palantir is going to get slammed by the Pentagon, that Amazon and Microsoft are going to see their cloud businesses slow down after a big run-up? It all fine in the big scheme of things, but at the end of the day, most of us just can't really do it.
Somebody the other day said to me, why would you do index funds when you could just pick the winners out of the index fund, just bet on the winners? And I thought this was one of the stupidest things I've heard in years, because if we could do that, we'd all be rich. And this guy wouldn't be giving investment advice. He would just be rich.
But the idea that we could outperform the market is a fool's errand. And the reality is when it's going well, everybody at the coffee shop, everybody that taxes a brilliant analyst and investor, when it's going poorly, then your allocation is very important.
But also, rather than the Palantirs of the world that went down 50% in the last couple weeks, when I thought it was a genius before that, far better than the index fund that's gone down 5%. It is what it is. And unless you could own a ton, a ton of stocks, probably far, far better off being an index fund.
So today's discussion is allocation of assets, index funds versus individual stocks, and away we go. Thank you for listening to the Becker Private Equity and Business Podcast.
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